Study of the extent of price transmission under agriculture trade liberalisation

Abstract

The main objective of the World Trade Organization’s Agreement on Agriculture (AOA) is to correct the distortion in international trade in_ agriculture. Under the renegotiations of agriculture, it is believed that reduction in direct and indirect subsidies, aggregate measurement support, and conversion of non-tariff barriers to tariff barriers extended to the agricultural sector in developed economies would result in rise of world prices for the agricultural commodities. The earlier studies on this aspects have had two distinguished views: one group of studies categorically supported that rise in world commodity price result in benefit to the country like India and on other hand there was a strong argument that the country as a whole would be the lose even a rise in world price because of asymmetric transmission from the world price to domestic prices. Hence, this study made an attempt to answer the following three questions: firstly, what type of trend in spread between world prices and domestic prices? Secondly, what proportion of the variations in world price is transmitted to domestic price? and finally, is the world price major contributor to variations in domestic prices? The empirical analysis was based on data from the Agricultural Prices in India, Ministry of Agriculture and Co-operation, Government of India, Percapita wage rate from Indian Labor Journal, Ministry of Labor, and IMF Financial Statistics for 1969-1995 and for the commodity Non-Basmati variety rice namely, Akkulu. The spread between domestic prices and world prices for rice almost increased by 2 times during 1974-1995. However, the spread between domestic consumer prices and domestic wholesale prices indicated a mixed trend during the same period. The increased spread index categorically indicated that rises in world price of rice and India's domestic wholesale price of rice are effectively pass-through on the domestic consumer prices over the period under study. The variations domestic prices are regressed with changes in world prices, exchange rates, and fixed time-effects, changes in labor unit cost to answer the second and third questions. The empirical results showed that there was asymmetry transmission of world price on domestic prices and the variations in world prices are transmitted into the domestic prices and the variation in world price is the major contributor to the variations in the domestic prices.